What Is a Takeover?
Let me explain what a takeover really means in the business world. It's when one company, which we call the acquirer, makes a successful bid to take control of or fully acquire another company, known as the target. You can achieve this by buying a majority stake in the target's shares, or it often happens through the merger and acquisition process.
Typically, you'll see larger companies initiating takeovers of smaller ones. These can be voluntary, where both sides agree it's a good move, or they can be unwelcome, with the acquirer pursuing the target without full consent or even knowledge at first.
In corporate finance, there are several ways to structure these deals. As the acquirer, you might go for controlling interest in the outstanding shares, buy the whole company outright, merge to create new synergies, or keep the target as a subsidiary.
Key Takeaways
Here's what you need to remember: A takeover happens when the acquiring company closes a bid to control or acquire the target. It's usually a bigger firm targeting a smaller one, and it can be friendly or hostile. Companies do this to capture value, drive change, or wipe out competition.
Understanding Takeovers
Takeovers are common in business, and they come in many structures depending on whether both parties agree. If a company owns more than 50% of another's shares, that's controlling interest, and you have to report it as a subsidiary with consolidated financial statements. Ownership between 20% and 50% uses the simpler equity method. In a full merger or acquisition, shares often combine under one symbol.
Types of Takeovers
Takeovers vary in form. A friendly one is usually a merger or acquisition where both boards see it as positive, and voting goes smoothly with key support. Shares get combined, often by exchanging target shares for those in the new entity.
Hostile takeovers get aggressive since the target isn't willing. The acquirer might use a dawn raid, buying a big stake right at market open to catch the target off guard. The target could fight back with a poison pill, letting shareholders buy more shares cheaply to dilute the acquirer's power.
A reverse takeover is when a private company takes over a public one to go public without an IPO's risks and costs, provided it has the capital.
Creeping takeovers build slowly as one company increases its shares in another. Once it hits 50%, consolidated reporting kicks in, which some avoid due to the responsibilities. Activists might use this to push for management changes over time.
Reasons for a Takeover
Companies initiate takeovers for several reasons. An opportunistic one happens when the target seems undervalued, offering long-term value through increased market share, economies of scale, cost reductions, and synergies.
Strategic takeovers let you enter new markets without extra time, money, or risk, or eliminate competitors directly.
Activist takeovers involve shareholders gaining control to force changes or secure voting rights.
Attractive targets include those with unique niches, small firms with good products but poor financing, nearby similar companies for efficiency gains, firms with high debt that could be refinanced cheaper, or companies with potential but bad management.
Funding Takeovers
Funding comes in different ways. For a public target, you can buy shares on the secondary market. In friendly deals, offers go for all outstanding shares, funded by cash, debt, or new stock in the combined company.
Using debt is a leveraged buyout, with capital from new lines or corporate bonds.
Example of a Takeover
Take ConAgra's attempt on Ralcorp in 2011. It started friendly but turned hostile after rebuffs, with Ralcorp using a poison pill. ConAgra offered $94 per share, way up from $65, but Ralcorp resisted initially. They bargained again the next year, closing a friendly deal at $90 per share after Ralcorp spun off its Post cereal division, adjusting the total business size.
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